Q&A 4Q22 Earnings Release
- Reasons for Exit from Judicial Reorganization in December 2022 and Entry into a new one in March 2023
1.The main steps provided for in the Judicial Reorganization Plan and the Amendment to the Judicial Reorganization Plan were successfully executed. Oi has advanced and successfully completed the most important transactions of its transformation plan, such as the successful migration to the structural separation model and completion of the M&A processes for the sale of control of UPI de Infraestrutura (V.tal) and UPI Ativos Móveis. This plan also included the implementation of cost reduction initiatives and resulted in the creation of one of the largest companies and user bases of fiber optics in the world, Oi Fibra, in addition to the recognized position of Oi Soluções in providing ICT solutions to large companies in the country.
As a consequence of the sale of assets there was a significant reduction in debt, which updated to 2016 values would be equivalent to 3 times the current value. This reduction was made through the payment of an amount of R$15 billion in 2022, including all of the Company’s extra-competitive debts and the payment of 100% of its financing with BNDES, of almost 5 billion reais.
In this way, the Court considered that the Oi Group fulfilled the commitments assumed in the Judicial Reorganization Plan and in the approved amendment, with supervision of the Public Prosecutor’s Office and the appointed Judicial Administrator, despite the reorganization of an economic and financial crisis of companies in recovery, as well as the market solutions created by them and approved by the creditors, As a rule, they may extend beyond the period of judicial supervision.
2.Why did Oi request entry into a new judicial reorganization in March 2023?
Oi’s recovery process, even if fulfilled to the letter, needs additional actions, mainly due to external and non-controllable conditions inherent to any long-term plan, such as the deterioration of the macroeconomic environment, with volatility in the exchange rate and interest rate, delays for regulatory approvals, as well as recent disputes arising from M&As in the case of the retained value of the sale of Móvel and the restrictions on the use of cash for the sale of Torres, imposed by the regulator.
Just to illustrate, we estimate that only the impact of the exchange rate on the original debt was in the order of R$10 billion.
With this, it is necessary to address, in a definitive way, the continuity of the debt restructuring process, in discussion with the main financial creditors of Oi, most of them being international funds, and whose premise is not to impact the day-to-day operation.
As announced, after fulfilling all the obligations hitherto arising from the Judicial Reorganization Plan approved in 2018 and closed at the end of 2022, Oi filed a new request for Judicial Reorganization in March 2023 focusing on the negotiation and restructuring of its financial debts, and whose processing was granted on March 17.
In fact, the Company began the renegotiation of its financial debt in mid-2022, with the hiring of the consulting firm Moelis & Company, announced in October 2022. The negotiations have been conducted with full transparency with the financial creditors and the market in general and, in this context, announced to the market in March 2023 that it reached an agreement on the main commercial terms and conditions for the restructuring of the Company’s debts and short- and long-term financing to be granted to support its ongoing operations with a group of creditors representing the majority of bondholders due in 2025 and holders of credits originating from contracts concluded with export credit agencies (ECAs).
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Capitalization of the Restructured Debt in the RJ process and consequent dilution of up to 80% of the current shareholders
3. What is the rationale behind conversion?
The conditions proposed in the RJ Plan filed in May 2023 are the result of a negotiation process with creditors that resulted in a proposal that allows the conversion of part of the company’s debt into Equity as established by law.
The conversion of part of Oi’s debt into shares is an important step to reduce the company’s leverage, as it will potentially reduce Oi’s financial debt, from amounts close to R$30 billion, by about 50%, creating a capital structure, terms and debt costs compatible with the company’s expectation of cash generation contributing to its sustainability.
4. Would it be possible to avoid dilution of the current shareholders?
Yes, the capitalization of credits will comply with the terms and conditions set forth in the Brazilian Corporation Law, including the right of preemption. In the event of exercise of the preemptive right by Oi’s shareholders, the amounts shall be paid by the respective shareholders in cash and shall be delivered, on a pro rata basis, to the Creditors, and the percentage of Oi’s total share capital to be held by the Creditors after the completion of the capitalization shall be proportionally reduced.
5. What would the company’s shareholding structure look like after the conversion of debt into Capital Stock?
Through the proposal contained in the Judicial Reorganization Plan, creditors will hold up to 80% of the Company’s reorganized share capital, and current shareholders, 20%. Even if it reduces the participation of the current shareholders, the operation will make them partners of a sustainable company and whose creditors become relevant shareholders, aligning their interests with the current shareholders.
- V.tal’s Partial Sale Strategy
6. What is the motivation behind the partial sale of V.tal?
Oi has sold part of its stake in V.tal, the largest fiber-neutral vehicle in Brazil, aiming at the best combination between obtaining liquidity to meet its financial obligations and maintaining a stake in a company with high growth potential and unique assets. In this way, Oi was able to reduce its debt by and still ensure its sustainability in the medium and long term by remaining a partner of a company whose market value should grow significantly in the coming years.
7. What is the current stake in V.tal ? Is there still any dilution expected in the near term?
Oi holds approximately 34.12% of V.tal’s shares after the investment of R$2.5 billion by the CCPIB pension fund in 4Q22. The contribution accelerated the expansion of V.tal, which provided Oi with the participation in a larger company with optimized growth.
Due to operational targets established in the V.tal sale agreement, and as communicated to the market in 2Q22, Oi’s expected stake in the company may reach approximately 30.5%.
8. What is the expected valuation of the company?
Internal studies based on 13 similar transactions found that fiber-neutral vehicles traded at EV/EBITDA multiples of approx. 17x EBITDA.
- Management Compensation and Long-Term Incentives (ILP)
9. Why was the ILP (Long-Term Incentive) eliminated from the current remuneration of directors and directors?
Faced with the challenging scenario of the implementation of the Company’s Strategic Transformation Plan, with the new request for Judicial Reorganization made in February 2023, the Board of Directors, based on analyses prepared by the Company and the People, Nominations and Corporate Governance Committee, momentarily suspended the implementation of the First Grant of said Plan.
10. How is the remuneration of the Executive Board and Board of Directors composed?
The Compensation of the Executive Board and Board of Directors is based on comparable market values and is composed of a fixed amount (46%) plus a bonus for short-term performance (54%). This structure considers it essential for the Company to approve the Judicial Reorganization Plan and generate Cash Flow in the short term for the maintenance of Oi’s operations and sustainability in the long term.
11. Does the Company intend to implement any stock-based compensation strategy?
The Company continuously studies share-based compensation programs and will reevaluate resuming the program from the approval of the current Judicial Reorganization Plan.
For more information on the topics discussed above in the 4Q22 Earnings Release, please visit: https://ri.oi.com.br/en/financial-information/results/
